Download Principles of Economics, Case and Fair,9e

PART I INTRODUCTION TO ECONOMICS
CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand, Supply, and
Market Equilibrium
3
CHAPTER OUTLINE
Firms and Households: The Basic
Decision-Making Units
Input Markets and Output Markets: The
Circular Flow
Demand in Product/Output Markets
Changes in Quantity Demanded versus Changes
in Demand
Price and Quantity Demanded: The Law of
Demand
Other Determinants of Household Demand
Shift of Demand versus Movement Along the
Demand Curve
From Household Demand to Market Demand
Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply
Other Determinants of Supply
Shift of Supply versus Movement Along the
Supply Curve
From Individual Supply to Market Supply
Market Equilibrium
Excess Demand
Excess Supply
Changes in Equilibrium
Demand and Supply in Product Markets: A
Review
Looking Ahead: Markets and the
Allocation of Resources
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Terms And Concepts
capital market: sermaye piyasası
complements, complementary goods: tamamlayıcı, tamamlayıcı mallar
demand curve: talep eğrisi
demand schedule: talep cetveli, talep şedülü (tablosu)
entrepreneur: girişimci, müteşebbis, iş adamı
equilibrium: denge
excess demand or (shortage): talep fazlası, aşırı talep, fazla talep veya
(noksanlık, yetersizlik, eksiklik)
excess supply or (surplus): arz fazlası, aşırı arz, fazla arz veya (fazla, artık)
factors of production: üretim faktörleri (vasıtaları)
firm: firma, işletme, müessese
households: hanehalkı
income: gelir
inferior goods: düşük mallar
input or factor markets: girdi piyasaları veya faktör piyasaları, üretim faktörleri
piyasası
labor market: işgücü piyasası, emek piyasası
land market: arazi piyasası, doğal kaynaklar piyasası
2
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
CHAPTER 3 Demand, Supply, and Market Equilibrium
terms and concepts
law of demand: talep (istem) yasası
law of supply: arz (sunum) yasası
market demand: piyasa (pazar, endüstri) talebi
market supply: piyasa (pazar, endüstri) arzı
movement along a demand curve: talep eğrisi boyunca hareket
movement along a supply curve: arz eğrisi boyunca hareket
normal goods: normal mallar
perfect substitutes: tam ikame edenler
product or output markets: ürün (çıktı) piyasaları
profit: kar
quantity demanded: talep edilen miktar
quantity supplied: arz edilen miktar
shift of a demand curve: talep eğrisinin yer değiştirmesi
shift of a supply curve: arz eğrisinin yer değiştirmesi
substitutes: ikame edenler (mallar, başkasının yerine geçen
supply curve: arz eğrisi
supply schedule: arz cetveli (şedülü, tablosu)
wealth or net worth: servet veya net değer (varlık)
3
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Firms and Households: The Basic Decision-Making Units
CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand, supply and market equilibrium: The basic forces and analysis
of market system:
Testes and preferences of consumers for many different goods in
modern economies can be satisfied by specialization of the producers.
When there is specialization, there must be exchange and markets.
Markets are the institutions through which exchange takes place.
Without any central planning, individual decision of households and
firms together, answer the three basic questions of an economic
system:
•
what gets produced,
•
how is it produced and
•
who gets what is produced?
It is necessary to analysis the behavior of two fundamental decision
making units that are firms and households.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Firms and Households: The Basic Decision-Making Units
Firm An organization that transforms resources (inputs) into
products (outputs).
Firms are the primary producing units in a market economy.
Most firms exist to make profit, except some of them like
some foundations.
They engage in production because they sell their products
for more then its cost.
It is assumed that firms make decisions in order to maximize
profits.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Firms and Households: The Basic Decision-Making Units
Entrepreneur A person who organizes, manages, and
assumes the risks of a firm, taking a new idea or a new
product and turning it into a successful business.
Early economics texts included entrepreneurship as a
type of input, just like land, labor and capital.
Treating entrepreneurship as a separate factor of
production is not common anymore since its different
nature from land, labor and capital. First of all it is
unmeasurable. If profit opportunities exist, that is likely
that entrepreneurs will crop up to take advantage of
them.
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Firms and Households: The Basic Decision-Making Units
Households The consuming units in an economy.
CHAPTER 3 Demand, Supply, and Market Equilibrium
A household may consist of any number of people.
Household decisions are based on individual testes and
preferences.
Even though households have wide-ranging preferences,
they also have some things in common.
All –even the very rich- have ultimately limited resourcesincomes, and all must pay in some way for the things they
consume.
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Input Markets and Output Markets: The Circular Flow
 FIGURE 3.1 The Circular Flow of Economic Activity
CHAPTER 3 Demand, Supply, and Market Equilibrium
Households and firms interact in
two basic kind of market:
•
Product (or output) markets
and
•
Factor (or input) markets.
product or output markets The
markets in which goods and
services are exchanged.
Firms supply goods and services
while households demand them in
products markets.
input or factor markets The
markets in which the resources
used to produce products are
exchanged.
Households supply production
factors while firms demand them in
factor markets.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
In the input, or factor markets, which side of the market do firms
and households occupy?
a.
Firms are on the supply side and households on the demand
side.
b.
Firms are on the demand side and households on the supply
side.
c.
Both firms and households are on the demand side.
d.
Both firms and households are on the supply side.
e.
Neither firms nor households are part of the demand side or
the supply side.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
In the input, or factor markets, which side of the market do firms
and households occupy?
a.
Firms are on the supply side and households on the demand
side.
b. Firms are on the demand side and households on the
supply side.
c.
Both firms and households are on the demand side.
d.
Both firms and households are on the supply side.
e.
Neither firms nor households are part of the demand side or
the supply side.
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Input Markets and Output Markets: The Circular Flow
CHAPTER 3 Demand, Supply, and Market Equilibrium
 FIGURE 3.1 The Circular Flow of Economic Activity
When a firm decides how
much to produce (supply) in
output markets, it must
simultaneously decide how
much of input it needs.
Similarly, when a household
decides how much to
demand in output markets,
it
must
simultaneously
decide how much of input to
supply. However, household
may have a constrain to
supply
labor,
due
to
unemployment that appears
periodically
in
market
economies.
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Input Markets and Output Markets: The Circular Flow
CHAPTER 3 Demand, Supply, and Market Equilibrium
 FIGURE 3.1 The Circular Flow of Economic Activity
The
circular
flow
of
economic activity shows
how firms and households
interact in input and output
markets.
Product or output markets
are the markets in which
goods and services are
exchanged.
Input markets are the
markets
in
which
resources—labor, capital,
and land—used to produce
products, are exchanged
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Input Markets and Output Markets: The Circular Flow
CHAPTER 3 Demand, Supply, and Market Equilibrium
 FIGURE 3.1 The Circular Flow of Economic Activity
Goods and services flow
clockwise. Firms provide
goods
and
services;
households supply labor
services.
Payments (usually money)
flow
in
the
opposite
direction (counterclockwise)
as the flow of labor
services,
goods,
and
services.
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Input Markets and Output Markets: The Circular Flow
CHAPTER 3 Demand, Supply, and Market Equilibrium
 FIGURE 3.1 The Circular Flow of Economic Activity
Input or factor markets are the
markets in which the resources
used to produce products are
exchanged. They include:
• labor market The input/factor
market in which households
supply work for wages to firms
that demand labor.
• capital
market
The
input/factor market in which
households
supply
their
savings, for interest or for
claims to future profits, to firms
that demand funds to buy
capital goods.
• land market The input/factor
market in which households
supply land or other real
property in exchange for rent.
factors of production
The
inputs
into
the
production
process. Land, labor, and capital
are the three key factors of
production.
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Input Markets and Output Markets: The Circular Flow
 FIGURE 3.1 The Circular Flow of Economic Activity
CHAPTER 3 Demand, Supply, and Market Equilibrium
The supply of inputs and their
prices ultimately determines
household income.
The amount of household
income depends on types and
quantities of inputs supplied.
Input and output markets are
connected through the behavior
of both firms and households:
•
Firms
determines
the
quantities and character of
outputs produced and the
types and quantities of inputs
demanded.
•
Households determine the
types and quantities of
products demanded and the
quantities and types of inputs
supplied.
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Input Markets and Output Markets: The Circular Flow
CHAPTER 3 Demand, Supply, and Market Equilibrium
 FIGURE 3.1 The Circular Flow of Economic Activity: A summary
Diagrams like this one show the
circular flow of economic activity,
hence the name circular flow diagram.
Here goods and services flow
clockwise: Labor services supplied by
households flow to firms, and goods
and services produced by firms flow to
households.
Payment (usually money) flows in the
opposite (counterclockwise) direction:
Payment for goods and services flows
from households to firms, and
payment for labor services flows from
firms to households.
Note: Color Guide—In Figure 3.1
households are depicted in blue and
firms are depicted in red. From now
on all diagrams relating to the
behavior of households will be blue or
shades of blue and all diagrams
relating to the behavior of firms will be
red or shades of red.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Which of the following is supplied by households in factor markets?
a.
Labor.
b.
Savings.
c.
Land.
d. All of the above.
e.
None of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Which of the following is supplied by households in factor markets?
a.
Labor.
b.
Savings.
c.
Land.
d. All of the above.
e.
None of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand in Product/Output Markets
A household’s decision about what quantity of a
particular output, or product, to demand depends
on a number of factors, including:
 The price of the product in question.
 The income available to the household.
 The household’s amount of accumulated
wealth.
 The prices of other products available to the
household.
 The household’s tastes and preferences.
 The household’s expectations about future
income, wealth, and prices.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand in Product/Output Markets
quantity demanded The amount (number of
units) of a product that a household would buy in a
given period if it could buy all it wanted at the
current market price.
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Demand in Product/Output Markets
Changes in Quantity Demanded versus Changes in Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
The most important relationship in individual markets is that
between market price and quantity demanded.
Changes in the price of a product affect the quantity
demanded per period. Changes in any other factor,
such as income or preferences, affect demand. Thus,
we say that an increase in the price of Coca-Cola is
likely to cause a decrease in the quantity of CocaCola demanded. However, we say that an increase
in income is likely to cause an increase in the
demand for most goods.
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Demand in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
Changes in Quantity Demanded versus Changes in Demand
It is very important to distinguish between price changes, which
affects the quantity of a good demanded, and changes in other
factors (such as income, wealth, prices of other products,
tastes-preferences, and future income, wealth and prices),
which change the entire relationship between price and quantity.
We use the ceteris paribus or “all else equal” device, to examine
the relationship between the quantity demanded of a good per
period of time and the price of that good, while holding income,
wealth, other prices, tastes, and expectations constant.
•
Changes in price affect the quantity demanded per period.
•
Changes in income, wealth, other prices, tastes, or
expectations affect demand.
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Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
demand schedule A table showing how much of a
given product a household would be willing to buy at
different prices. The table on the right is a hypothetical
demand schedule of Anna’s telephone calls.
demand curve
A graph below
illustrating how much
of a given product a
household would be
willing to buy at
different prices.
ANNA'S DEMAND
SCHEDULE FOR
TELEPHONE CALLS
PRICE
(PER CALL)
$
0
0.50
3.50
7.00
10.00
15.00
QUANTITY
DEMANDED
(CALLS PER
MONTH)
30
25
7
3
1
0
The relationship between price
(P) and quantity (q) presented
graphically is called a demand
curve.
Demand curves are usually
derived from demand schedules.
The demand curve presents
graphically the same information
as demand schedule.
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Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand
 FIGURE 3.2 Anna’s Demand Curve
CHAPTER 3 Demand, Supply, and Market Equilibrium
TABLE 3.1 Anna’s Demand Schedule
for Telephone Calls
Price
(Per Call)
$
0
.50
3.50
7.00
10.00
15.00
Quantity Demanded
(Calls Per Month)
30
25
7
3
1
0
The relationship between price (P) of per
call and quantity demanded (q) of calls
per month is presented graphically on the
right as a demand curve. Demand curves
have a negative slope, indicating that
lower prices cause quantity demanded to
increase. Note that Anna’s demand curve
is blue; demand in product markets is
determined by household choice.
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Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand Curves Slope Downward
law of demand The negative relationship between
price and quantity demanded: As price rises,
quantity demanded decreases; as price falls,
quantity demanded increases.
It is reasonable to expect quantity demanded to fall
when price rises, ceteris paribus, and to expect
quantity demanded to rise when price falls, ceteris
paribus. Demand curves have a negative slope.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Price and Quantity Demanded:
The Law of Demand
The law of demand states
that there is a negative
(inverse),
relationship
between price and the
quantity of a good demanded
and its price.
Demand curves
negative slope.
have
a
This means that demand
curves slope downward. As
price
rises,
quantity
demanded decreases. As
price falls, quantity demanded
increases.
26
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
CHAPTER 3 Demand, Supply, and Market Equilibrium
Fill in the blanks. It is reasonable to expect that quantity
demanded will __________ when price rises, ceteris paribus,
and that demand curves have a __________ slope.
a.
rise; positive
b.
rise; negative
c.
fall; positive
d.
fall; negative
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Fill in the blanks. It is reasonable to expect that quantity
demanded will __________ when price rises, ceteris paribus,
and that demand curves have a __________ slope.
a.
rise; positive
b.
rise; negative
c.
fall; positive
d. fall; negative
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Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Other Properties of Demand Curves
Two additional things are notable about Anna’s
demand curve.
As long as households have limited incomes and
wealth, all demand curves will intersect the price axis.
For any commodity, there is always a price above
which a household will not or cannot pay. Even if the
good or service is very important, all households are
ultimately constrained, or limited, by income and
wealth.
That demand curves intersect the quantity axis is a
matter of common sense. Demand in a given period
of time is limited, if only by time, even at a zero price.
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Demand in Product/Output Markets
Price and Quantity Demanded: The Law of Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Other Properties of Demand Curves
To summarize what we know about the shape of
demand curves:
1. They have a negative slope.
An increase in
price is likely to lead to a decrease in quantity
demanded, and a decrease in price is likely to
lead to an increase in quantity demanded.
2. They intersect the quantity (X-) axis, a result of
time limitations and diminishing marginal utility.
3. They intersect the price (Y-) axis, a result of
limited incomes and wealth.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
That demand curves intersect both the price and the quantity axes
is a matter of common sense. Which of the following
explains that they intersect the price axis?
a.
Time limitations and diminishing marginal utility.
b.
Limited incomes and wealth.
c.
The law of demand.
d.
All of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
That demand curves intersect both the price and the quantity axes
is a matter of common sense. Which of the following
explains that they intersect the price axis?
a.
Time limitations and diminishing marginal utility.
b. Limited incomes and wealth.
c.
The law of demand.
d.
All of the above.
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Demand in Product/Output Markets
Other Determinants of Household Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Income And Wealth
income The sum of all a household’s wages,
salaries, profits, interest payments, rents, and
other forms of earnings in a given period of
time. It is a flow measure.
wealth or net worth The total value of what
a household owns minus what it owes. It is a
stock measure.
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Demand in Product/Output Markets
Other Determinants of Household Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Income And Wealth
normal goods Goods for which demand
goes up when income is higher and for which
demand goes down when income is lower.
inferior goods Goods for which demand
tends to fall when income rises.
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Demand in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
Other Determinants of Household Demand
Prices of Other Goods and Services
substitutes Goods that can serve as
replacements for one another; when the price of
one increases, demand for the other increases.
perfect substitutes Identical products.
complements, complementary goods Goods
that “go together”; a decrease in the price of one
results in an increase in demand for the other and
vice versa.
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Demand in Product/Output Markets
Other Determinants of Household Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Tastes and Preferences
Income, wealth, and prices of goods available are the
three factors that determine the combinations of
goods and services that a household is able to buy.
Changes in preferences can and do manifest
themselves in market behavior.
Within the constraints of prices and incomes,
preference shapes the demand curve, but it is difficult
to generalize about tastes and preferences. First, they
are volatile. Second, tastes are idiosyncratic.
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Demand in Product/Output Markets
Other Determinants of Household Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Expectations
What you decide to buy today certainly depends
on today’s prices and your current income and
wealth.
There are many examples of the ways
expectations affect demand.
Increasingly, economic theory has come to
recognize the importance of expectations.
It is important to understand that demand
depends on more than just current incomes,
prices, and tastes.
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Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
 FIGURE 3.3 Shift of a Demand Curve Following a Rise in Income
TABLE 3.2 Shift of Anna’s Demand Schedule
Due to increase in Income
CHAPTER 3 Demand, Supply, and Market Equilibrium
Schedule D0
Price
(Per Call)
Schedule D1
Quantity Demanded Quantity Demanded
(Calls Per Month at an (Calls Per Month at
Income of $300 Per
an Income of $600
Month)
Per Month)
$ 0.00
30
35
0.50
25
33
3.50
7
18
7.00
3
12
10.00
1
7
15.00
0
2
20.00
0
0
When the price of a good changes, we move
along the demand curve for that good.
When any other factor that influences demand
changes (income, tastes, and so on), the
relationship between price and quantity is
different; there is a shift of the demand curve, in
this case from D0 to D1. Telephone calls are
normal goods.
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Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
A change in demand is not the same as a change in quantity demanded.
CHAPTER 3 Demand, Supply, and Market Equilibrium
A change in demand causes shift of a demand curve as a whole while a change in
quantity demanded causes movement along a demand curve.
shift of a demand curve The change that takes place in a demand curve
corresponding to a new relationship between quantity demanded of a good and
price of that good. The shift is brought about by a change in the original conditions.
Changes in determinants of demand, other than price, cause a change in demand,
or a shift of the entire demand curve.
movement along a demand curve The change in quantity demanded brought
about by a change in price.
Change in price of a good or service leads to
Change in quantity demanded (movement
along the demand curve).
Change in income, preferences, or prices of other
goods or services leads to
Change in demand (shift of the demand
curve).
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A Change in Demand Versus a Change in Quantity Demanded
When the price of good changes, the quantity demanded of that good changes
and we move along the demand curve for that good.
CHAPTER 3 Demand, Supply, and Market Equilibrium
Change in price of a good or service causes
Change in quantity demanded
(Movement along the curve).
When not price but any other factor that influences demand changes (income,
preferences, or prices of other goods or services) the demand of that good
changes and the demand curve of that good shifts.
The relationship between price and quantity is different; there is a shift of the
demand curve, in this case from D0 to D1.
Telephone calls are normal goods.
Change in income, preferences, or
prices of other goods or services causes
Change in demand
(Shift of curve).
40
© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster
CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. Which move illustrates the impact of a
decrease in market price on market demand, all else the same?
a.
The move from A to B.
b.
The move from A to C.
c.
Both moves show the same result on demand.
d.
None of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. Which move illustrates the impact of a
decrease in market price on market demand, all else the same?
a.
The move from A to B.
b.
The move from A to C.
c.
Both moves show the same result on demand.
d.
None of the above.
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Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
 FIGURE 3.4 Shifts versus Movement Along a Demand Curve
CHAPTER 3 Demand, Supply, and Market Equilibrium
The Impact of a Change in Income
a. When income increases;
• the demand for inferior goods shifts to the left (higher income
decreases the demand for an inferior good) and
• the demand for normal goods shifts to the right (higher income
increases the demand for a normal good).
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Demand in Product/Output Markets
Shift of Demand versus Movement Along a Demand Curve
 FIGURE 3.4 Shifts versus Movement Along a Demand Curve (continued)
CHAPTER 3 Demand, Supply, and Market Equilibrium
The Impact of a Change in the Price of Related Goods
b. If the price of hamburger rises, the quantity of hamburger demanded declines:
this is a movement along the demand curve.
The same price rise for hamburger would shift;
• the demand for chicken (a substitute for hamburger) to the right and
• the demand for ketchup (a complement to hamburger) to the left.
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Demand in Product/Output Markets
From Household Demand To Market Demand
CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand for a good or service can be defined for an individual
household, or for a group of households that make up a market.
market demand The sum of all the quantities of a good or service
demanded per period by all the households buying in the market
for that good or service.
A market demand curve shows the total amount of a product that
would be sold at each price.
The total quantity demanded is different from market demand. The
total quantity demanded in the market at a given price is simply the
sum of all the quantities demanded by all the individual
households shopping in the market at that price.
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Demand in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
From Household Demand To Market Demand
The market demand curve is the sum of all the individual demand
curves that is, the sum of all the individual quantities demanded at
each price.
The market demand curve thus takes its shape and position from the
shapes, positions, and number of individual demand curves.
Each additional individual demand curves shifts the market demand
curve to the right.
Market demand curves may also shift as a result of preference
changes, income changes, or changes in the number of demanders.
As a rule, capital letters refer to entire market and lowercase letters
refer to individual households or firms.
For example, Q refers to total quantity demanded in the market, while
q refers to the quantity demanded by individual household.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. Assume that TVs and VCRs are two
complements and that the diagram below represents the
demand for VCRs. Which move would best describe the
impact of a decrease in the price of TVs on this diagram?
a.
The move from A to B.
b.
The move from A to C.
c.
Both a and b above.
d.
None of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. Assume that TVs and VCRs are two
complements and that the diagram below represents the
demand for VCRs. Which move would best describe the
impact of a decrease in the price of TVs on this diagram?
a.
The move from A to B.
b. The move from A to C.
c.
Both a and b above.
d.
None of the above.
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Demand in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
From Household Demand To Market Demand: Assuming there are only three
households in the market, market demand is derived as follows:
 FIGURE 3.5 Deriving Market Demand
from Individual Demand Curves
Total demand in the marketplace is simply the sum
of the demands of all the households shopping in a
particular market. It is the sum of all the individual
demand curves—that is, the sum of all the
individual quantities demanded at each price.
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Supply in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
In addition to dealing with household demands, economic theory
deals with the behavior of business firms, which supply in output
markets and demand in input markets
Supply decisions depend on profit potential.
Successful firms make profits because they are able to sell their
products for more than it costs to produce them.
profit The difference between revenues and costs.
The amount of revenue depends on selling price and quantity of
the product.
The amount of cost depends on many factors, the most important
of which are:
•
The kinds of inputs needed to produce the product,
•
The amount of each input required and
•
The prices of inputs
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Supply in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
The supply decision is just one of several decisions that firm
makes to maximize profit.
There are usually a number of ways to produce any given
product.
Firms must choose the production technique most
appropriate to their products and projected level of
production.
The best method of production is the one that minimizes
cost, thus maximizing profit.
Production technique depends on input prices. For
example, labor is chosen when it is cheaper than
machinery.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Supply in Product-Output Markets
CLARENCE BROWN'S
SUPPLY SCHEDULE
FOR SOYBEANS
PRICE
(PER
BUSHEL)
$
2
1.75
2.25
3.00
4.00
5.00
QUANTITY
SUPPLIED
(THOUSANDS
OF BUSHELS
PER YEAR)
0
10
20
30
45
45
quantity supplied The amount
of a particular product that a firm
would be willing and able to offer
for sale at a particular price
during a given time period.
A supply schedule is a table
showing how much of a product
firms will supply at different
prices.
52
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Price and Quantity Supplied:
The Law of Supply
• law of supply
The positive
relationship between price and
quantity of a good supplied:
Price of soybeans per bushel ($)
CHAPTER 3 Demand, Supply, and Market Equilibrium
p
6
•
An increase in market price will
lead to an increase in quantity
supplied, and a decrease in
market price will lead to a
decrease in quantity supplied.
•
This means that supply curves
typically have a positive slope.
•
supply curve A graph
illustrating how much of a
product a firm will sell at
different prices
5
4
3
2
1
q
0
0
10
20
30
40
Thousands of bushels of soybeans
produced per year
50
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Supply in Product/Output Markets
Price and Quantity Supplied: The Law of Supply
 FIGURE 3.6 Clarence Brown’s Individual Supply Curve
CHAPTER 3 Demand, Supply, and Market Equilibrium
TABLE 3.3 Clarence Brown’s Supply
Schedule for Soybeans
Price (Per Bushel)
Quantity Supplied
(Bushels Per Year)
$1.50
0
1.75
10,000
2.25
20,000
3.00
30,000
4.00
45,000
5.00
45,000
A producer will supply more when the
price of output is higher.
The slope of a supply curve is positive.
Note that the supply curve is red: Supply
is determined by choices made by firms.
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Supply in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
Determinants Of Supply
Assuming that its objective is to maximize profits, a firm’s decision
about what quantity of output, or product, to supply depends on:
1. The price of the good or service.
2. The cost of producing the product, which in turn depends on:
• The price of required inputs (labor, capital, and land).
• The technologies that can be used to produce the
product.
3. The prices of related products.
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Supply in Product/Output Markets
Other Determinants Of Supply
CHAPTER 3 Demand, Supply, and Market Equilibrium
The Cost Of Production
In order for a firm to make a profit, its revenue must exceed its costs.
Thus, the supply decision is likely to change in response to changes in
the cost of production.
Cost of production depends on a number of factors, including the
available technologies and the prices and quantities of the inputs
needed by the firm (labor, land, capital, energy, and so on).
The technological advance lowers the cost of production and
increases the productivity.
The prices of related product.
•
Increase in the price of substitute product leads to increase in
production of that product.
•
Increase in the price of complement product leads to decrease
in production of that product.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
The decision of a profit-maximizing firm about what quantity of
output to supply depends on:
a.
The price of the good or service.
b.
The cost of producing the product.
c.
The technologies that can be used to produce the product.
d.
All of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
The decision of a profit-maximizing firm about what quantity of
output to supply depends on:
a.
The price of the good or service.
b.
The cost of producing the product.
c.
The technologies that can be used to produce the product.
d. All of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Shift of Supply Versus Movement Along a Supply Curve
A supply curve shows the
relationship between the
quantity of a good supplied by
a firm and the price that
product brings in the market.
movement along a supply
curve The change in quantity
supplied brought about by a
change in price.
When the price of a product
changes, ceteris paribus, a
change in the quantity
supplied follows.
A higher price causes higher
quantity supplied, and a move
along the supply curve.
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Shift of Supply Versus Movement Along a Supply Curve
CHAPTER 3 Demand, Supply, and Market Equilibrium
We know that when the price
of a product changes, we
move along the supply curve
for that product; the quantity
supplied rises or falls.
When not price but any other
factor effecting supply
changes, the supply curve
shifts as a whole.
shift of a supply curve The
change that takes place in a
supply curve corresponding to
a new relationship between
quantity supplied of a good
and the price of that good.
The shift is brought about by
a change in the original
conditions.
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Supply in Product/Output Markets
Shift of Supply versus Movement Along a Supply Curve
 FIGURE 3.7 Shift of the Supply Curve or Soybeans Following Development of a New Seed Strain
TABLE 3.4 Shift of Supply Schedule for Soybeans
Following Development of a New
Disease-Resistant Seed Strain
CHAPTER 3 Demand, Supply, and Market Equilibrium
SCHEDULE D0
SCHEDULE D1
Quantity Supplied Quantity Supplied
Price
(Bushels per Year (Bushels per Year
(per Bushel) Using Old Seed) Using New Seed)
$1.50
0
5,000
1.75
10,000
23,000
2.25
20,000
33,000
3.00
30,000
40,000
4.00
45,000
54,000
5.00
45,000
54,000
When the price of a product changes,
we move along the supply curve for
that product; the quantity supplied
rises or falls.
When any other factor affecting supply
changes, the supply curve shifts.
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Shift of Supply Curve for Soybeans Following Development of a New Seed Strain
CHAPTER 3 Demand, Supply, and Market Equilibrium
•
•
•
the factor affecting supply
of soya beans may be a
technological change in
soybean production.
There is a shift of the
supply curve as a result of
technological change in
soybean production
The technological advance
leads to more output that
can be supplied for at any
given price level
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Shift of Supply Versus Movement Along a Supply Curve
As with demand, it is very important to distinguish between
movements along supply curves (changes in quantity supplied)
and shifts in supply curves (changes in supply):
CHAPTER 3 Demand, Supply, and Market Equilibrium
To summarize:
Change in price of a good or service
leads to
Change in quantity supplied
(Movement along the curve)
Change in costs, input prices, technology, or prices of related
goods and services leads to
Change in supply
(Shift of curve)
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Supply in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
From Individual Supply to Market Supply
The supply of a good or service can be defined for
an individual firm, or for a group of firms that make
up a market or an industry.
market supply The sum of all that is supplied each
period by all producers of a single product.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
From Individual Supply to Market Supply
•
The supply of a good or service can be defined for an individual
firm, or for a group of firms that make up a market or an industry.
•
market supply The sum of all that is supplied each period by all
producers of a single product.
•
As with market demand, market supply is the horizontal
summation of individual firms’ supply curves.
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Supply in Product/Output Markets
CHAPTER 3 Demand, Supply, and Market Equilibrium
From Individual Supply to Market Supply
 FIGURE 3.8 Deriving Market Supply
from Individual Firm Supply Curves
Total supply in the marketplace is the sum of all
the amounts supplied by all the firms selling in
the market. It is the sum of all the individual
quantities supplied at each price.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. Which of the following moves best describes what
happens when a change in the price of soybeans affects market supply?
a.
A move from A to B.
b.
A move from A to C.
c.
Either move from A to B or A to C.
d.
A move from B to C.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. Which of the following moves best describes what
happens when a change in the price of soybeans affects market supply?
a.
A move from A to B.
b.
A move from A to C.
c.
Either move from A to B or A to C.
d.
A move from B to C.
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Market Equilibrium
 FIGURE 3.9 Market Equilibrium & Excess Demand, or Shortage
CHAPTER 3 Demand, Supply, and Market Equilibrium
Market Equilibrium
Supply and demand in the
market interact to determine
equilibrium price and quantity
equilibrium The condition that
exists when quantity supplied
and quantity demanded are
equal.
At equilibrium, there is no
tendency for price to change.
Only in equilibrium is quantity
supplied equal to quantity
demanded.
At any price level other than P0,
such as P1, quantity supplied
does not equal quantity
demanded.
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Market Equilibrium
Excess Demand
 FIGURE 3.9 Excess Demand, or Shortage
CHAPTER 3 Demand, Supply, and Market Equilibrium
Excess demand or shortage
The condition that exists when
quantity demanded exceeds
quantity supplied at the current
price
When quantity demanded exceeds
quantity supplied, price tends to
rise until equilibrium is restored.
At a price of $1.75 per bushel,
quantity demanded exceeds
quantity supplied.
When excess demand exists, there
is a tendency for price to rise.
When quantity demanded equals
quantity supplied, excess demand
is eliminated and the market is in
equilibrium. Here the equilibrium
price is $2.50 and the equilibrium
quantity is 35,000 bushels.
When quantity demanded exceeds quantity supplied,
price tends to rise. When the price in a market rises,
quantity demanded falls and quantity supplied rises
until an equilibrium is reached at which quantity
demanded and quantity supplied are equal.
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Market Equilibrium
 FIGURE 3.10 Excess Supply, or Surplus
CHAPTER 3 Demand, Supply, and Market Equilibrium
Excess Supply
excess supply or surplus The
condition that exists when
quantity supplied exceeds
quantity demanded at the
current price
When quantity supplied exceeds
quantity demanded, price tends
to fall until equilibrium is restored
At a price of $3.00, quantity
supplied exceeds quantity
demanded by 20,000 bushels.
This excess supply will cause
the price to fall.
When quantity supplied exceeds quantity demanded at the current price, the price
tends to fall.
When price falls, quantity supplied is likely to decrease and quantity demanded is
likely to increase until an equilibrium price is reached where quantity supplied and
quantity demanded are equal.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. When market price is $1.75, which of the following
is correct?
a.
There is excess supply.
b.
There is a surplus.
c.
Quantity demanded is greater than quantity supplied.
d.
All of the above.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Refer to the figure below. When market price is $1.75, which of the following
is correct?
a.
There is excess supply.
b.
There is a surplus.
c.
Quantity demanded is greater than quantity supplied.
d.
All of the above.
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Market Equilibrium
Changes In Equilibrium
When supply and demand curves shift, the equilibrium price and
quantity change.
CHAPTER 3 Demand, Supply, and Market Equilibrium
 FIGURE 3.11 The Coffee Market: A Shift of Supply and Subsequent Price Adjustment
Before the freeze, the coffee
market was in equilibrium at
a price of $1.20 per pound.
At that price, quantity
demanded equaled quantity
supplied.
The freeze shifted the
supply curve to the left (from
S0 to S1), increasing the
equilibrium price to $2.40.
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Market Equilibrium
CHAPTER 3 Demand, Supply, and Market Equilibrium
Changes In Equilibrium
 FIGURE 3.12 Examples of
Supply and Demand Shifts for
Product X
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Which of the following situations leads to a lower equilibrium price?
a.
An increase in demand, without a change in supply.
b.
A decrease in supply accompanied by an increase in demand.
c.
A decrease in supply, without a change in demand.
d. A decrease in demand accompanied by an increase in supply.
e.
An increase in demand accompanied by an increase in supply.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Which of the following situations leads to a lower equilibrium price?
a.
An increase in demand, without a change in supply.
b.
A decrease in supply accompanied by an increase in demand.
c.
A decrease in supply, without a change in demand.
d. A decrease in demand accompanied by an increase in supply.
e.
An increase in demand accompanied by an increase in supply.
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Market Equilibrium
CHAPTER 3 Demand, Supply, and Market Equilibrium
Changes In Equilibrium
Bad News for Orange Juice
Fanatics
Orange Juice Prices Could
Skyrocket After Freeze Destroys
Most of California Output
City News
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Demand and Supply in Product Markets: A Review
CHAPTER 3 Demand, Supply, and Market Equilibrium
Here are some important points to remember about the
mechanics of supply and demand in product markets:
1. A demand curve shows how much of a product a
household would buy if it could buy all it wanted at the
given price. A supply curve shows how much of a product
a firm would supply if it could sell all it wanted at the given
price.
2. Quantity demanded and quantity supplied are always per
time period—that is, per day, per month, or per year.
3. The demand for a good is determined by price, household
income and wealth, prices of other goods and services,
tastes and preferences, and expectations.
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Demand and Supply in Product Markets: A Review
CHAPTER 3 Demand, Supply, and Market Equilibrium
Here are some important points to remember about the
mechanics of supply and demand in product markets:
4. The supply of a good is determined by price, costs of
production, and prices of related products. Costs of
production are determined by available technologies of
production and input prices.
5. Be careful to distinguish between movements along
supply and demand curves and shifts of these curves.
When the price of a good changes, the quantity of that
good demanded or supplied changes—that is, a
movement occurs along the curve. When any other
factor changes, the curve shifts, or changes position.
6. Market equilibrium exists only when quantity supplied
equals quantity demanded at the current price.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Demand and Supply in Product Markets: A Review
Why Do the Prices of
Newspapers Rise?
In 2006, the average price for a daily edition of a Baltimore
newspaper was $0.50. In 2007, the average price had risen to $0.75.
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CHAPTER 3 Demand, Supply, and Market Equilibrium
Looking Ahead: Markets and the Allocation of Resources
You can already begin to see how markets answer the basic
economic questions of what is produced, how it is produced, and
who gets what is produced.
 Demand curves reflect what people are willing and able
to pay for products; demand curves are influenced by
incomes, wealth, preferences, prices of other goods,
and expectations.
 Firms in business to make a profit have a good reason
to choose the best available technology—lower costs
mean higher profits.
 When a good is in short supply, price rises. As it does,
those who are willing and able to continue buying do so;
others stop buying.
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In Summary:
CHAPTER 3 Demand, Supply, and Market Equilibrium
•
•
•
Markets answer the basic economic questions of
what is produced, how it is produced and who
gets what is produced.
A firm will produce what is profitable to produce. If
it can sell a product at a price that is sufficient to
leave a profit after production costs are paid, it will
in all likelihood produce that product.
Resources will flow in the direction of profit
opportunities.
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